Amazon’s shipping and logistics spend remains in lockstep with expectations

While Amazon’s earnings are typically astronomical—and the 3rd quarter was no exception, with revenue up 23.7% annually—what truly stood out in supply chain circles is the company’s ongoing and increasingly intense focus on all things shipping and logistics.

This was highlighted by Amazon executives noting that the company will spend roughly $1.5 billion—yes, billion—on its one-day shipping efforts, replacing its ubiquitous Prime two-day shipping program. Amazon founder and CEO Jeff Bezos said that the company is ramping up to make its 25th holiday season the best ever for Prime customers, with millions of products available for one-day delivery.

“Customers love the transition of Prime from two days to one day—they’ve already ordered billions of items with free one-day delivery this year,” said Bezos. “It’s a big investment, and it’s the right long-term decision for customers. And although it’s counterintuitive, the fastest delivery speeds generate the least carbon emissions because these products ship from fulfillment centers very close to the customer, as it simply becomes impractical to use air or long ground routes. Huge thanks to all the teams helping deliver for customers this holiday.”

Bezos’ comments reinforce some key themes when it comes to how Amazon has approached shipping and logistics, especially in recent years, in that it’s not slowing down or taking any shortcuts in its quest for “customer obsession.” It appears that motivation continues to be increasingly coming in the form of tactical logistics moves geared towards constantly meeting and exceeding customer expectations—a goal that’s firmly in the crosshairs of its competitors as well.

As for its 3rd quarter performance and approach to it one-day shipping efforts, Brian Olsavsky, Amazon senior vice president and CFO, said that Amazon has made rapid progress on one-day, adding that it will be a great additional service for customers in the 4th quarter.

Addressing the $1.5 billion spend figure for the 3rd quarter, Olsavsky explained it represents: “The cost of shipping, which is essentially transportation costs, the cost of expanding out transportation capacity, things like adding additional poles and shifts in our warehouses because of forward deploying inventory closer to customers—there’s a lot of tangential costs, but in a way the biggest expense is on the actual transportation cost.”

And part of that investment focuses on what the long-term structure will be and how it can bring those costs in line. Olsavsky said Amazon has temporary short-term costs as it goes about things like forward deployed inventory, boosting inbound flow into warehouses, building new capacity for Amazon Logistics, adding sorting centers, pumping up staffing and building in later pull times to meet one-day cut offs.

What’s more, these efforts represent what Olsavsky called a “drastic change” to the Amazon network topology—change that it’s approaching head on.

From a competitive perspective, these efforts do not disqualify Amazon from outsourcing logistics services where and when needed. According to Olsavsky, Amazon will leverage a combination of its own capacity resources, coupled with using third-party carriers and large carriers that it has used in the past. “We see a role for all carriers, including the Delivery Service Partner program we’ve developed to help spur small business to help fill this need as well,” he adds.

Jerry Hempstead, president of parcel express advisory firm Hempstead Consulting, points out that on its earnings call Amazon was careful to say that they will not be coming after their transportation partners, including UPS, DHL, OnTrac, and LaserShip, among others. He added that Amazon is relying on its organic growth to fill its capacity needs, which seems to be based on its increase in sales in the 3rd quarter.

In a research note, Neil Saunders, managing director of GlobalData Retail, commented that while the transition to free one-day shipping was a “classic Amazon move, it comes with some significant costs, with Amazon’s shipping costs up 46% annually, which affected operating income and net income by 14% and 26%, respectively.”

As for the higher shipping costs it will absorb, Saunders said that’s not necessarily something that will “spook” Amazon; rather, it sees the higher shipping expense as an investment in the Prime platform and a way to retain the loyalty of its shoppers.

“As the top line results testify, there’s some merit in this argument,” Saunders wrote. “However, one of the issues is that delivery is the new battleground for all online players. As such, it has not taken long for others such as Walmart and Best Buy to roll out their own versions of one-day delivery. Other retailers, like Target, are equally ramping up efforts around same-day, in-store collection and free shipping for the holidays. Where Amazon leads, others quickly follow.”

Amazon going “big” remains as clear as day when it comes to its shipping spend as well as its vision. Amazon will continue to go big to get goods into our homes—that has never been a secret. With the busiest shopping and shipping period of the year pretty much here, it figures to be an exciting and hectic time in the race to one-day.